Agricultural Business Plan Guidelines

Agricultural Business Plan Guidelines

agriculture, forestry & fisheries

Department: Agriculture, Forestry and Fisheries REPUBLIC OF SOUTH AFRICA

Agricultural Business Plan Guidelines

June 2011

Directorate Co-operative and Enterprise Development DEPARTMENT OF AGRICULTURE, FORESTRY AND FISHERIES

2011

Printed and published by Department of Agriculture, Forestry and Fisheries

Design and layout by Directorate Communication Services Private Bag X144, Pretoria 0001

Table of contents

1. Executive summary ...............................................................................................................................1

2. Problem statement ................................................................................................................................1

3. Objectives ..............................................................................................................................................2

4. Part 1.......................................................................................................................................................2 4.1 Overview of agricultural business plan guidelines.............................................................................. 2

4.2 Definition of a business plan.............................................................................................................. 2

4.3 Reasons for drafting a business plan................................................................................................. 2

4.4 The benefits of a well-prepared business plan................................................................................... 3

4.5 Reasons for business failures............................................................................................................ 3 4.5.1 Management reasons:.............................................................................................................. 3 4.5.2 Financial factors:...................................................................................................................... 4 4.5.3 Other:......................................................................................................................... 4

4.6 Common mistakes in the drafting of business plans.......................................................................... 4 4.6.1 Cash flow.................................................................................................................................. 4 4.6.2 A vague business plan............................................................................................................. 4 4.6.3 Unrealistic assumptions............................................................................................................ 4 4.6.4 Risks......................................................................................................................................... 4 4.6.5 Competition.............................................................................................................................. 4 4.6.6 Suppliers................................................................................................................................... 4

5. Part II.......................................................................................................................................................5 5.1 Methodologies and sources for information collection....................................................................... 5 5.1.1 Methodology................................................................................................................. 5 5.1.2 Sources.......................................................................................................................5 5.1.2.1. Find a similar business in or around your area............................................................... 5 5.1.2.2. Scan local newspapers or other media.......................................................................... 5 5.1.2 3. Government departments.......................................................................................5 5.2 Step-by-step approach in drafting a business plan............................................................................ 5 5.2.1. New farming enterprise........................................................................................................... 5

5.3 Recommended production system size........................................................................................ 6 5.3.1. Recommended minimum farm size for cattle..................................................................... 6 5.3.2. Recommended farm size for grain production under dry land................................................. 6 5.3.3. Recommended minimum farm size for vegetables.............................................................. 6 5.3.4. Recommended minimum farm units for broilers.................................................................. 6 5.3.5. Recommended minimum farm units for layers.................................................................... 6

5.4 Supporting documents required by financiers/investors/sponsors..................................................... 6

6. Available funding programmes and other funding institutions.........................................................7

7. Part III......................................................................................................................................................7 7.1 Framework for an agricultural business plan...................................................................................... 7

7.2 Finances........................................................................................................................................... 12 7.2.1 Cash flow................................................................................................................................. 12 7.2.2 Balance sheet.......................................................................................................................... 14 7.2.3 Income statement.................................................................................................................... 15

Agricultural Business Plan Guidelines

1

1.

EXECUTIVE SUMMARY

The Medium Term Strategic Framework (MTSF) mandate accentuates the need to create a nation united in diversity to work together to ensure a more equitable distribution of the benefits of economic growth and to reduce inequality. Cognisance of the differentiated and heterogeneous resource requirements in agricultural entities in terms of challenges, opportunities and potentialities has been the underlying reason for the approach taken in this intervention.

This document is a result of numerous calls for help from potential farmers, aspiring entrepreneurs and government officials from all the provinces requesting guidance with drafting bankable business plans. Research has shown that prospective entrepreneurs are not familiar with the contents of their business plan, because they seldom contribute (input) into the development of a business plan. This is a recipe for disaster. Consultants/agencies that draw up business plans for these entrepreneurs operate commercial businesses and they are seldom interested in whether the outcomes of the business plans are attained.

The intention of this document, therefore, is to provide guidance and to capacitate entrepreneurs and prospective entrepreneurs in the agricultural sector to access opportunities successfully and in managing and sustaining enterprising activities from farm level through to the entire agricultural value chain. Studies have shown that low-income entrepreneurs are more vulnerable to risks than their high- income counterparts. Grant beneficiaries operating agricultural activities often lack knowledge and expertise in managing the financial aspects of the business, resulting in them being exposed to the smallest economic shocks.

The Business Plan Guidelines is developed to provide comprehensive, simplified and not too complicated information required by funding institutions/investors/sponsors for prospective farmers/entrepreneurs wanting to make inroads into the agricultural sector.

Details on the purpose and process of drafting a bankable business plan will be provided by unpacking, with explanations, the different components of the business plan. Information on how to access the funding programmes will be provided.

It is envisaged that the professionals engaged in Business Plan Formulation, i.e. Agricultural Scientists including Economists from the provincial offices; government institutions entrusted with the responsibility of distributing financial assistance for agribusinesses/entrepreneurs like the AgriBEE fund, CASP and Mafisa and those individuals seeking to start their businesses, will find these guidelines useful.

The structure of the document will provide the objectives for the Business Plan Guidelines and encompass Part I, Part II and Part III as detailed below.

Part I of the guidelines will provide an overview of the Business Plan Guidelines; the definition of the Business Plan; the reasons for drafting the Business Plan; the benefits of a good business plan; the failures of businesses and, finally, common mistakes in drafting business plans.

Part II of the guidelines will attempt to cover methodologies and sources that can be utilised in information collection; the steps to take in preparing the business plan/proposal and the pertinent information required by funding institutions/investors to ensure successful applications/bankable business plans.

Part III will provide a generic format/structure that can be used.

2.

PROBLEM STATEMENT

One of the great challenges facing the agricultural sector is to increase the number and variety of viable and sustainable economic agricultural enterprises. The global downturn in the past few years has further amplified this challenge. Government is of the view that strengthening competitiveness and promotion of small and medium-sized enterprises and cooperatives remain cornerstones for the growth of the economy and the creation of decent work opportunities. In the agricultural sector, it is found that entrepreneurial and management skills/abilities are lacking in many individuals who are trying to access enterprising opportunities.

Employment opportunities in the commercial agricultural sector were limited to unskilled labour where the incomes were very low. Downstream (input suppliers) and upstream (processors of food and fibre) were in the hands of a few commercial producers, depriving rural people of economic opportunities. These factors were

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Department of Agriculture, forestry and Fisheries

responsible for creating the extreme dualism and inequality in the sector as well as the uneven income distribution. Notably, agriculture comprises a first and second economy, both competing for the same resources and markets. Participants in the second economy were compromised owing to limitations in accessing large, stable and sustainable markets.

Many projects receiving funding from government programmes and/or sponsors and and/or loans from funding institutions have either failed or failed to meet their financial obligations.

3.

OBJECTIVES

3.1

To provide a guide to existing and new entrepreneurs on the practicalities of business plans.

3.2

To contribute to better managed business ventures.

3.3

To empower and capacitate entrepreneurs in understanding the various elements of the business plan.

3.4

To provide details and composition of the relevant information required for drafting business plans.

3.5

To explain the merits of a good business plan

3.6

To enhance and support decision making in SMMEs

4.

PART 1

4.1

Overview of agricultural business plan guidelines

Business Plan Guidelines is a document aimed at guiding the writer through providing criteria on the drafting or formulation of business plans. Various business plan formats are available from all the provincial departments and private sector organisations and are obtainable from them. The approach used in developing these guidelines is to provide substantive information in support of the various formats currently existing and being used for drafting business plans.

This document will assist in addressing the lack of capacity to draft a proper business plan for an entrepreneur who wants to start a new enterprise/venture, expand or diversify his current operations and to those who want to be in control and make sound management/business decisions. Furthermore, it will try to assist in securing finances for the business given the present agricultural environment.

The format proposed in this document will be a generic one. The guidelines are designed to cover a diversity of situations and can be adjusted to address the specific needs of the agricultural business venture.

4.2

Definition of a business plan

A business plan is a document/plan of how a business owner, manager or entrepreneur intends to organise an entrepreneurial endeavour and implement activities necessary and sufficient for the venture to succeed. It is an essential tool for planning, direction and running a business. It clarifies the operational and financial objectives of a business and contains the detailed plans and budgets showing how the objectives are to be realised.

4.3

Reasons for drafting a business plan

Businesses need plans to optimise growth and development according to priorities. A business plan is not only to look for financial assistance or for initiating a business start-up, but it is an evolving working document that should be reviewed regularly and adopted to the business circumstances as and when the internal and external environment changes. It will always be a useful tool to persuade others to invest time, money and effort in the business. Failure to plan is a plan to fail. A business plan with well-defined goals is a necessity for business management. Planning properly for your business is a tool for success, as a good plan maps the course of action to achieve your business goals and aspirations.

Farmers/producers/entrepreneurs in agriculture, especially the smallholder farmers, should use a business plan as the operational tool that directs each and every step in the business. Entrepreneurs want to see a return on their investment as they invest time, money and emotional effort into planning the business.

Agricultural Business Plan Guidelines

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A business plan can be used as a powerful sales document for raising money. A business plan is a prerequisit for engaging with a venture capitalist, and/or investors. To raise funds for a start-up business venture or to raise additional capital, your document must fulfil the requirements of a funding institution or sponsor and this will give the reader an insight into what you will be doing in your proposed or existing business. The organisations that lend money to your business also want to get a return on their investment. They want a `safe' investment with relatively low risk. A thorough business plan can accomplish this.

Your plan will assist you in what to do and when to do it. Entrepreneurs should use their business plan for the critical start up. Entrepreneurs should use their business plan for start up of operations; or during expansion of operations to ensure that they stay on target and within the budget at all times.

Prospective entrepreneurs involved in the process of formulating their own business plans from the onset, will be more objective and critical towards their business than if it is prepared by outside consultants or individuals.

4.4

The benefits of a well-prepared business plan

A business plan will provide you with a clear strategy and objectives. A good business plan will give you direction and keep you and your staff focused. In writing your business plans you may make mistakes which can be corrected on paper prior to implementing your plans, which can save you money.

The business plan demonstrates the seriousness of your intentions to banks, investors, colleagues and employees. It can be used as a measure for you to foresee/anticipate problems and take appropriate action timeously. All your ideas can be incorporated into the business plan to become a reality. The planning process affords you the opportunity of adopting a step-by-step approach in preparing for the future achievement and risks of your business venture. At the end of the process, you should be confident that the plan will work.

The good business plan involves research on the external and internal business environment like competitors, suppliers, consumers, etc., which can be translated into a detailed action plan showing the areas of competitive advantage and how you will combat problems. You can use the business plan to identify opportunities, analyse the life cycle of the business and each activity in the business and plan for capital requirements. Milestones with timeframes can assist the business in achieving its objectives within the stipulated schedules.

4.5

Reasons for business failures

The reasons mentioned down below are just a few and are not limited to these only.

4.5.1 Management reasons:

? A poor management team with insufficient experience and/or the wrong skills mix for the needs of the business.

? A narrow customer base and inadequate marketing skills. ? Inadequate marketing planning. ? Under or overpricing products and/or services offered by the business. ? Overtrading and running short of working capital. ? Poor product and service quality. ? Owner/managers who are autocratic, inflexible and make strategic decisions based on emotion. ? A weak business concept, in that the product/market mix is not clearly defined and developed. ? A failure to identify and manage risks.

4.5.2 Financial factors:

? Businesses without proper record/account of the financial transaction of the business. ? Insufficient information on financial performance required for basic decision making. ? Financial information based on incomplete or inferior technologies. ? Insufficient supporting evidence on financial track record to obtain additional funds/loans. ? Poor management of accounts payable and receivable.

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